The OCC Overreach

By Charles G. Cooper

Throughout my career regulating the financial services industry, I have learned the benefit of taking measured regulatory action, including fully understanding the risks and implications of developments in financial services before putting into place a new rule or regulatory approach.

This principle of informed regulation is being ignored by the Office of the Comptroller of the Currency (OCC). The agency is getting ready to act outside its mandate by seeking to create a new national bank charter for non-banks. Think about it – a bank charter for nonbank companies.

This unauthorized expansion of federal authority likely will have unintended consequences of determining winners and losers within the financial technology marketplace and introducing new forms of risk into the financial system. All while conducting an end run around Congress.

The OCC is heading down a dangerous path and taking the financial system with it. By inventing its own rules rather than implementing the law, the OCC is pushing a highly disruptive agenda:

Awarding federal charters with little transparency on the decision-making process and without acknowledging the impact on competitive marketplace;
Tossing aside the traditional means to ensure the safety and soundness of the financial system; and
Regulating industries it has never regulated before.

Let’s start with the basics. The OCC, which regulates national banks, says it has statutory authority to regulate a broad range of non-banks. It does not. Only Congress can grant that authority, and it has not.

Then there is the matter of Washington inserting itself into a marketplace. Through the OCC’s new charter, it seems that only the big and established would qualify. As a result, the OCC would, in effect, be using chartering powers for the chosen ones to create a barrier to entry for all others. Not exactly pro-competition.

What if these newly-chartered entities run into problems? If they violate consumer rights, state protections and enforcement will not apply. If they start struggling, neither will traditional safeguards to protect safety and soundness.

And if they undermine the payments system, data breaches will be the least of our worries. Imagine a fintech company using the federal charter to enlarge its footprint in payments, losing its near-term funding from investors, and operating outside the norm of financial regulation. Suddenly, honoring payments will no longer be a sure thing. Who will be left holding the bag? It will be the consumers, small businesses and taxpayers.

It is these very risks – a level playing field for competition, and safety and soundness – that concern state financial regulators. States are like the OCC in that we charter banks, regulating three-fourths of banks nationwide. We are unlike the OCC in that our mandate has long included banks and non-banks alike. Non-depository entities in mortgages, consumer finance and money services are not foreign to us; we have been regulating them for years.

Indeed, in the wake of the U.S. financial crisis, Congress embraced the Nationwide Multistate Licensing System (NMLS), which state regulators use to license a wide range of non-depositories, help align laws across state lines, and provide consumers with direct access to the information of licensed entities.

State regulators ensure a level playing field by coordinating licensing criteria; we don’t have a favored-few approach. Thus, in the NMLS more than 20,000 non-depository companies are licensed to operate at a state level, reflecting a robust, competitive marketplace. The OCC’s chartering move needlessly threatens this marketplace competition.

In sum, there are important public policy issues that deserve a full debate in Congress, such as the future of a competitive industry, the integrity of our nation’s payment system, and the ability of consumers to be protected against bad actors and taxpayers from new risk. None of these issues should be determined through unilateral action by any one regulator.